How the Israel–Iran War Could Impact the U.S. Stock Market

The outbreak of direct war between Israel and Iran in June 2025 is already sending shockwaves across global markets. While the human toll is tragic, the financial consequences could be far-reaching—particularly for the U.S. stock market.

Here’s a clear, technical breakdown of what to expect, what sectors are at risk, and which assets may benefit.

1. Oil Prices: The Inflation Catalyst

Iran is a major oil exporter and sits beside the Strait of Hormuz, a chokepoint for ~20% of global oil shipments. A prolonged conflict risks disrupting this flow.

• Impact: Crude oil prices have already surged over 10%. If this persists, it could:
• Increase fuel, transportation, and logistics costs across sectors.
• Push inflation higher—reversing the Fed’s disinflation trend.

Stocks at risk:

• Airlines (e.g., DAL, UAL)
• Shipping/logistics (e.g., FDX, UPS)
• Consumer goods (higher input and transport costs)

Stocks that may benefit:

• Oil majors like ExxonMobil (XOM), Chevron (CVX)
• Oil ETFs like XLE

2. Defense Sector Rally

With active conflict between two regional powers and potential proxy escalations (e.g., Hezbollah, Houthis), defense stocks are spiking.

• Why? Governments worldwide tend to increase military budgets during geopolitical crises.

Winners:

• Lockheed Martin (LMT), Raytheon (RTX), Northrop Grumman (NOC)
• Defense ETFs (e.g., ITA)

This mirrors past patterns: defense stocks often outperform during wartime uncertainty.

3. Fed Policy: Rate Cuts in Jeopardy?

The market had priced in one or two Fed rate cuts by September 2025. But:

• Higher oil = higher CPI = less room for cuts
• Stagflation risk (low growth + high inflation) could emerge
• The Fed may be forced to hold or delay easing, which is bearish for equities, especially tech and growth stocks.

ETFs under pressure:

• Nasdaq-100 (QQQ)
• S&P 500 Growth ETF (SPYG)

4. Safe-Haven Rotation

Markets hate uncertainty—and war creates plenty.

Increased flows into:

• Gold and Gold ETFs (GLD)
• U.S. Treasuries
• The U.S. Dollar (DXY)

Meanwhile, equities—especially small caps and emerging markets—could see outflows.

Conclusion

Unless the Israel–Iran war de-escalates quickly, the U.S. stock market may face weeks of volatility, with oil prices and Fed policy driving sentiment.

Short-term winners: Oil & gas, defense, safe havens

Sectors at risk: Growth tech, travel, consumer discretionary

Investors should watch:

• Energy prices
• Fed commentary
• Signals of further regional escalation (proxy attacks or U.S. involvement)